Forensic Accounting

1
Forensic Accounting

• Dr. Lynn H. Clements
• CPA CFE Cr.FA CMA CFM

2
What is Forensic Accounting?

• An orderly analysis, investigation, inquiry,
  test, inspection, or examination along a paper
  trail in the search for fraud, embezzlement, or
  hidden assets
• Two parts
• Investigative accounting
• Litigation support
• Treats all figures as suspect until proven
  otherwise

3
The History of Forensic Accounting

• 1931
• World War II
• 1980s Real estate bankruptcies, junk bond
  schemes, and lawsuits
• 1988 ACFE was formed in Austin, Texas
• Initially called investigative accounting
• Increase in regulatory, tax and criminal statutes
  became law

4
The Need for Forensic Accountants

• A 2001 survey found the following
• 37 of the countrys top 100 accounting firms are
  increasing their forensic and fraud services
• The average organization loses 6 of revenue to
  employee fraud and abuse
• The typical perpetrator
• Colleges and universities are responding
• Many frauds are not reported
• There are 13,000 CFEs in the ACFE, compared to
  2,300 just 10 years ago
• Wells Report

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What Does a Forensic Accountant Do?

• Attempt to obtain the truth and develop an expert
  opinion
• Sniff out corruption
• Pore over financial documents, reconstruct
  records, interview people, and present report
  interpreting and explaining complicated financial
  information
• Solve a large puzzle

6
The Services a Forensic Accountant Provides

• Damages
• Antitrust Analyses
• Accounting
• Valuation
• General Consulting
• Other Analyses

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How to Become A Forensic Accountant

• CFE (Certified Fraud Examiner)
• Experience requirements (point system)
• Educational requirements
• Uniform CFE Examination (online quiz)
• CPE
• Code of Ethics
• High moral character
• www.cfenet.com
• Fraud Check-Up

8
How to Become A Forensic Accountant

• Cr.FA (Certified Forensic Accountant)
• CPAs - one exam
• Regional conferences
• www.acfe.com
• American College of Forensic Examiners

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The Fraud Triangle
Motive
Rationalization
Opportunity
Source Michael Kurland, How to Solve A Murder
Macmillan, 1995, pp. 7-8
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Proactive Fraud Auditing

• Going fishing
• Thinking like a fraud auditor
• Choosing a fraud type
• Procedures

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Reactive Fraud Auditing

• Symptoms
• Cost Variances
• Expected Costs
• Employees Lifestyle

12
Fraud vs. White-Collar Crime

• White collar crime is criminal conduct that does
  not involve violence or the threat of violence
  and usually takes place in a professional work
  place
• Fraud happens anywhere, white-collar crime is in
  the workplace
• Fraud is perpetrated by anyone, white-collar
  crime is by business people/professionals.
• Fraud is not always criminal, white-collar crime
  is mostly criminal
• Fraud does not always involve something of value,
  white- collar crime does.

13
Red Flags

• No Company Policy Manual
• Feeling of disorganized bookkeeping, purchasing,
  receiving, and/or warehousing departments
• Missing documents
• Unrecorded transactions
• No bank reconciliations
• Subsidiary ledgers out of balance
• No physical inventory counts
• Checks written to cash
• Large related party loans
• Excessive other revenue
• Negative operating cash flow
• Downward earnings trend

• Handwritten checks
• Extensive fund transfers
• Unusual transactions (inconsistent)
• Deficient hiring policies and procedures
• Employees lifestyles inconsistent with salaries
• Employees who dont take vacations
• SPEs
• Excessive insider sales of stock
• Unexplained resignations of upper management
• Excessive debt/equity ratio
• CPA switching
• Strange account titles

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Forensic Accounting Pros and Cons

• Why?
• Innovation in the industry
• Serve a cause, help to fight organized crime
• Gratification
• 175 to 300 per hour
• Why not?
• Verbal attacks by lawyers in depositions and on
  the witness stand
• Dealing with lawyers on a regular basis
• Attention to detail